Second-quarter pay-for-performance update for the S&P/TSX 60 companies: high expectations

Our last update on the S&P/TSX 60 revealed increased CEO bonuses and robust payouts from long-term performance plans in 2016. In this update, we highlight 2017 performance expectations and 2017 performance for the first six months to set the context for 2017 incentive payouts. For a more detailed analysis of companies’ financial performance last year, see “Pay-for-performance updates for the S&P/TSX 60: pay for 2016 performance” Executive Pay Matters, August 16, 2017.

The expectations for S&P/TSX 60 companies in 2017, as shown in Figure 1, are very positive. Many of the key financial indicators are forecasted to grow past their performance levels in 2016. Revenue growth is expected to have the biggest change, more than double the rate in 2016. EBIT growth is expected to increase by 50%, whereas cash flow and EPS growth are expected to nearly double. However, return on equity (ROE) is expected to slightly decrease.

Figure 1: Analysts’ growth expectations for the S&P/TSX 60 in 2017

Figure 2 shows the S&P/TSX 60 companies are on track to generate the improved results expected by analysts. The table compares the first six months of 2017 to the first six months of 2016. Overall, the scorecard shows a significantly stronger financial performance. Among the financial indicators from Figure 1, six-month performance is meeting or exceeding full-year 2017 expectations. We do, however, observe a decrease in the levels of market-based measures relative to the first half of 2016, particularly the 8% differential in total shareholder return (TSR) which might reflect future expectations for more modest performance and potentially a weaker second half of the year. In any event it could set up some interesting pay-for-performance discussions, given the disparity in financial and market-based results.

Figure 2: First half financial scorecard for the S&P/TSX 60

Overall, the S&P/TSX 60 companies are off to a strong start in 2017. As the energy sector is a major contributor to the S&P/TSX 60 performance, and with more stable commodity prices over the past year, the sector has strongly contributed to the improved results. Based on 2017 expectations reinforced by financial performance for the first six months of the year, we can expect robust bonuses for the S&P/TSX 60 companies as financial objectives will most likely exceed targets. The outcome for long-term performance plan payouts is less clear-cut, given the more modest TSR results and flat share prices.

Looking ahead, current year performance and the potential disconnect between financial results and TSR can also have implications for 2018 incentives. In our experience, goals tend to flex in strong and weak years in order to manage the probability of achieving target, and continued uncertainty makes goal setting increasingly difficult. Willis Towers Watson has been helping companies calibrate incentive plans goals using predictive analytics, namely with our proprietary predictive performance model (PPM). To learn more about our model, follow the link here.